Good morning! Here’s what you need to know.
The Chinese yuan takes its largest drop since 2005. The yuan fell 0.9% to a 10-month low of 6.1808 per dollar in Shanghai. “FX sales data released this week point to continued strong capital inflows in January, and there are no signs of large capital outflows or sharp deterioration in fundamentals in recent weeks,” Jian Chang at Barclays wrote in a note to clients. “This supports the view that the recent CNY devaluation was mostly guided by the PBoC to deter speculative capital inflows, rather than due to capital outflows on concerns of China risks”
Mt. Gox files for bankruptcy. The Bitcoin exchange’s chief executive Mark Karpeles blamed “a weakness in our system” at a press conference in Japan, where the company was based. Mt. Gox froze withdrawals earlier this month after weeks of glitches and issues, and now many in the Bitcoin world are worried they lost their holdings in what was once the world’s largest Bitcoin exchange.
It’s a packed day of economic data, starting with U.S. GDP at 8:30 a.m. ET. Economists expect Q4 GDP was revised down from 2.5% to 3.2%. “Substantial downward adjustments to core ex auto retail sales in November and December, which recast the holiday shopping season as slow instead of strong, pointed to a downward revision to consumption to +2.8% from +3.3%,” wrote Morgan Stanley’s Ted Wieseman. “Lower results than BEA assumed for December international trade and wholesale inventories should lower the initially estimated +1.3pp net exports and +0.4pp inventories contributions by 0.2pp each.”
Then at 9:45 a.m., Chicago PMI will be released. Economist expect the regional indicator fell to 56.4 in February from 59.6 the month prior. “We anticipate a substantial drop-off in the Chicago business barometer in February,” wrote Citi’s Peter D’Antonio. “The Chicago area is accustomed to nasty winter conditions, so we normally wouldn’t look for weather effects in a manufacturing index from that region. However, the region’s activity would be affected by a pullback in demand for its products due to weather. In this case, the relative importance of autos means that the dramatic weather-related reduction in vehicle sales in recent months (and the corresponding overstocked lots and reduced orders) could impact this measure of activity.”
Consumer confidence comes out at 9:55 a.m. Economists believe the final reading of the Michigan consumer confidence measure will come in at 81.2. “On one hand, higher utilities bills during the winter season could cut into discretionary income and weigh on the index,” wrote Nomura economists. “On the other hand, households have been more optimistic about the labour market and their finances.”
At 10:00 a.m., we’ll get pending home sales. Economists are looking for sales to increase 1.5% in January. Though, some are forecasting a drop. “We look for pending home sales, which track signed contracts on single-family homes, condos, and co-ops, to fall 5% m/m in January,” wrote Barclays economists. “One factor in our forecast is MBA applications for purchase, which rose 4.4% on the month after declining 6.1% in December. Buyer traffic in the NAHB home index, however, fell to 40 in January, perhaps driven by adverse weather, and is suggestive of less momentum.”
Ukraine’s interior minister says Russian forces have begun an “armed invasion” in Crimea by blocking an air base and entering another airport in the Black Sea peninsula, the AFP reports. “The incidents come a day after dozens of pro-Moscow gunmen seized government buildings in the Crimean capital of Simferopol including the regional parliament, which subsequently voted to hold a referendum on May 25 to expand the region’s autonomy from Kiev,” according to the report.
Introducing a new 10 Things feature, a short Q&A with industry experts. Today’s interview is with Jeff Kleintop, chief market strategist at LPL Financial.
BUSINESS INSIDER: To what extent do you think poor weather has impacted this winter’s economic data?
JEFF KLEINTOP: It’s been significant, but not the whole story as growth remains below average. While seasonal adjustments attempt to capture normal variations, data from NOAA shows that snowfall and cold (heating degree days) have been extreme this winter with the worst coming in February and likely to impact data yet to be reported. The stock market is clearly giving the data the benefit of the doubt since the combination of genuinely weak economic data and ongoing tapering would be giving investors more of a cold chill than what we have seen. I would expect a few more “growth scares” this year like we saw in January that take stocks down 5%+ before reversing.
BI: What’s the big story that nobody is talking about right now?
JK: The consistency of domestic equity mutual fund inflows this year during the January pullback and since reported by ICI is a big story. Investors chase five-year returns and they keep going up as we roll off the last of the financial crisis bear market. The 5 year annualized return for the S&P 500 is now 25%! The second wind for the bull market from individual investors finally rotating back to stocks may be being underestimated.
BI: Are you optimistic about Janet Yellen as Fed chair?
JK: She is the first Fed chair in over three decades to have hair–it will take some getting used to. But seriously, she marks a shift in the balance of focus on the Fed’s dual mandate from inflation to employment. The longer-term impact may be a steeper yield curve than what we have been used to or the market currently expects.
BI: The stock market is roaring back to all time highs. Do issues in EM not have as big an impact on U.S. markets as people argued a few weeks ago?
JK. The weakness in emerging markets should not be seen as a signal of a broad global economic deterioration that could spread and tip the world back into a global recession. In fact, just the opposite — many emerging markets had become dependent upon global economic weakness. The soft global economy of the past five years prompted the Federal Reserve (Fed) and other central banks to pump money into the global financial system, encouraging capital to flow into the emerging markets and allowing them to run unsustainable current account and budget deficits. Now, as global growth is improving, we are seeing the Fed begin to slow its bond purchases, and that change is prompting some emerging markets to have to quickly adjust by devaluing their currencies and sharply slowing spending. So, much of the turmoil in the emerging markets is actually the result of the improving economic growth around the world and not a sign that it is weakening.
BI: What’s something you’ll be watching this week and next?
JK: I will be watching sector leadership. With economic data mostly missing expectations this year it makes sense that defensive sectors like Utilities and Healthcare have outperformed this year and posted solid gains. But much of that performance may be the result of a poor stock market return YTD and falling yields than a true rotation to defensives. In fact, cyclical sectors have been generally outperforming over the past month as stocks rebounded. If the data starts to improve as the weather improves, defensive and interest rate sensitive sectors like Utilities would be at risk as rates move higher.
Now back to 10 Things…
Asian markets were mixed in overnight trading. Japan’s Nikkei fell 0.55% while Shanghai climbed 0.44%. Markets across Europe were lower and U.S. futures were pointing to a negative open.
India’s slow growth. Economists believe India’s economic growth will remain below the 5% mark for the fifth straight quarter, the Wall Street Journal reports. “India’s pace of economic expansion has halved to a decade-low of 4.5% in the last fiscal year from about 9% till two years before that. Overburdened infrastructure, rising borrowing costs, bureaucratic red-tape and uncertainty over tax policies have spooked consumers and corporations in Asia’s third largest economy,” according to the Journal.
European unemployment stays flat while Japan looks healthier. According to new data from Eurostat, the unemployment rate in the euro area held at 12%. Meanwhile, data on Japanese consumer prices, industrial production, and labour market all looked solid.